Buyers

Shopping for a Home Loan
How Much House Can You Afford?

When applying for a home loan, ask whether you are dealing with a direct lender or a broker. A broker may charge a fee to find a home loan for you.

When you begin shopping for a home loan, check your credit report for any potential problem areas. Your ability to get a home loan and the interest rate you pay will be directly impacted by your credit score.

Federal law entitles you to one free credit report from each agency per year. Get your free reports at www.annualcreditreport.com or contact one of the following agencies:

• Equifax: 1-877-576-5734; www.equifax.com
• Experian: 1-888-397-3742; www.experian.com/fraud
• TransUnion: 1-800-680-7289; www.transunion.com

How Much Can You Afford to Pay on a Home Loan?

Make a list comparing your debt and income when you first start shopping for a home loan. How much do you think you can you comfortably afford to pay for on a home loan? Never hide expenses that don’t show up on your credit report. False reporting when applying for a home loan could lead to foreclosure on your home loan. When researching the cost of your home loan, ask about:

• required down payment
• monthly loan payment
• home loan term
• type of home loan
• interest rate and type of rate, fixed or variable
• annual percentage rate taking into account points, broker fees and other credit charges
• points quoted as a dollar amount instead of just the number of points
• Fees including:
  • home loan origination fees
  • underwriting fees
  • broker fees
  • home loan transaction, settlement and closing costs

Many home loan fees are negotiable. You will pay some fees when you apply for a home loan (whether you actually get the home loan or not). Application fees and appraisal fees are generally paid in the beginning of the process. Ask for an explanation of any home loan fee you don’t understand.

You might need to buy private home loan mortgage insurance (PMI). If you are not able to pay a standard 20 percent down on a conventional home loan, you will most likely be required to purchase home loan insurance.

There are many housing assistance programs available to help those who cannot pay a standard down payment. When you qualify for a government-assisted home loan, your lender is guaranteed repayment if you default on a home loan. Some of these programs are

• FHA-Federal Housing Administration home loans
  
• VA-Veterans Administration home loans
• Rural Development Services home loans
  

Ask home loan specialists about special programs for which you might qualify. Find out exactly how much your total home loan cost and monthly home loan cost will be with taxes and insurance.

Once you find the right home loan, ask for a written lock-in from the lender or broker. Be sure the document includes the:

• period the lock-in lasts
• number of points to be paid on the home loan
• home loan interest rate guaranteed
• home loan lock-in fees and whether or not they will be refunded at closing

Try Our Formula

In general, home loan specialists look for a total 41 to 45 percent debt-to-income ratio including your housing expenses. To determine what that means for you, follow this formula:

YOUR GROSS INCOME X 43%=MAXIMUM ALLOWABLE MONTHLY DEBT

Say your gross income (before taxes) is $3,500 per month. The formula would look like this:
$3,500 X .43 = $1,505

Your total recurring debt, including home loan payments, should not exceed $1,505 in order to be considered for a home loan. So, if you have a:
$220 car payment
$50 credit card payment
$30 personal loan payment

Your monthly obligations (excluding home loan) equal $300. Now, subtract your monthly obligations for the maximum allowable debt and the formula will look like this:

MAXIMUM ALLOWABLE DEBT – OTHER MONTHLY OBLIGATIONS = ALLOWABLE HOUSING EXPENSE

Or

$1,500 – 300 = $1,200 (allowable housing expense)
These are, of course, very general figures. With a $1,200 allowable home loan expense, there are many other numbers to consider. The cost of the home is just one factor. Your payments will also be based on:
•    down payment
•    interest rate
•    geographic area applicable taxes and insurance
•    loan term

RE/MAX Premier Group  lists and sells homes in every price range. You can even search for homes right now on our website, by setting up your own search criteria to include the price range that works for you. To get stated click here!